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Chinese Walls and Audit Independence

No ambiguity - Chinese walls are out!

The recently released APES 110 Code of Ethics for Professional Accountants including Independence Standards makes it clear that Chinese walls do not proffer acceptable independence for SMSF audits. With the ATO systematically reviewing audit arrangements and independence, now is the time to take heed of the APES Code... and take action.

"Some members of the accounting profession may consider certain types of clients, such as a self-managed superannuation fund to be ‘small clients’ and incorrectly assume the independence requirements do not necessarily apply. This is not the case." (para 4.8) The Code goes on to say, "The independence requirements apply equally to all assurance engagements, whether large or small."

"Independence is linked to the fundamental principles of objectivity and integrity. Members shall be guided not merely by the words but also by the spirit of the Code" (para 1.7).

Key changes

Major changes in the Fifth Edition of the Independence Guide include application of the enhanced conceptual framework in the Code to existing examples of independence issues. The guidelines explicitly state that an “auditor cannot audit an SMSF where the auditor, their staff or their firm has prepared the financial statements unless it is a routine or mechanical service”. However, preparation of financial statements can only be considered "routine or mechanical" if the trustee has the suitable skills, knowledge and experience to remain responsible for their decisions, as well as oversee the service and understand the objectives, nature and results of the firm’s services. In most cases, this is unlikely and therefore the firm would be unable to prepare both the financial statements and audit under the new Code. SMSF auditor independence has long been a compliance focus for regulators. Both the ATO and ASIC have previously raised concerns about reciprocal arrangements whereby two SMSF auditors audit each other’s personal SMSF, or where two firms prepare the financials in-house and then enter into an agreement to audit each other’s SMSF clients representing a reciprocal arrangement. Situations where the SMSF auditor is also involved in preparing accounts and statements for the SMSFs they audit have also been of significant concern to the ATO. Conceptual Framework of the Code The new Code gives clarity on threats to independence and how these threats should be treated.

Threats to independence include: Self-interest threat: The threat that a financial or other interest will inappropriately influence a member’s judgement or behaviour 120.6 A3(a). Advocacy threat: The threat that a member will promote a client’s or employing organisation’s position to the point that the member’s objectivity is compromised 120.6 A3(c). Familiarity threat: The threat that due to a long or close relationship with a client, or employing organisation, a member will be too sympathetic to their interests or too accepting of their work 120.6 A3(d). Further Recommendations from Parliamentary Inquiry The Parliamentary Joint Committee on Corporations and Financial Services (PJC Inquiry) in August 2019 made further terms of reference for conflicts of interest and the performance of regulators. The PJC issued its Interim Report in February 2020 that included 10 recommendations, which have not yet been implemented, but include:

  • Establish defined categories and associated fee disclosure requirements in relation to audit and non-audit services;

  • Establish a list of non-audit services that audit firms are explicitly prohibited from providing to an audited entity;

  • The auditor’s independence declaration be expanded to require confirmation that no prohibited non-audit services have been provided; and

  • Consider revising the Code to include a safeguard that no audit partner can be incentivised, through remuneration, advancement or any other means or practice, for selling non-audit services to an audited entity.

So watch this space... A Chinese Wall does not equal genuine audit independence Finally it is clear that arrangements where a medium-sized firm uses an interstate office or a so-called "Chinese Wall" between divisions, are not acceptable under the Code. A firm's referral networks and how commercial interests have the potential to compromise professional standards is a clear threat to independence. When a firm has a heavy reliance on fees generated by a particular source or where an auditor has a close personal or business relationship with that referral source, there is a threat to independence. Simply put, there isn't genuine audit independence when there is an implicit conflict of interest underpinning the working relationship. Embrace the value of genuine independence Genuine audit independence protects your firm, your clients and your reputation. Impartial advice and professional judgement helps you to make the right decisions, which delivers the best outcomes for your clients and your practice.

While Accountants are well advised to be prudent around the focus on genuine independence to avoid breaches, the more important point is embrace the benefits that genuine independent advice gives your firm.

Why miss out on impartial advice and create risk, simply to give a marketing funnel of work to another division in your firm?

Keep the objectives clear and make the first - and only - priority to manage your SMSF practice professionally.

At Saul SMSF we have always been a believer in professional quality and audit independence. Why not embrace the value that comes with this?

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